Asian Center for Democratic Governance

Asian Center for Democratic Governance >> Freedom of Information for Good Governance

A Report by the Asian Center for Democratic Governance
6 - 8 August 2001
New Delhi, India

Program:

Main

Agenda

Session I:
An Overview of the Legal-Political Environment in Regard to Freedom of Information

Session II:
Freedom of Information: The Media's Role in Ensuring Transparency

Session III:
Freedom of Information: The Government's Role in Providing Transparency

Session IV:
Economic Information and the Role of the Business Community

Session V:
The Impact of New Technologies on Freedom of Information Appendices:

Workshop Presenters

Background

Official Information Act

Closing Remarks

Session IV - Economic Information and the Role of the Business Community

OPENING REMARKS

John Zemko
Chair

We will discuss how to formulate understanding in the business community, and the benefits of strong corporate governance. We will also be talking about the importance of establishing international studies for accounting, as another aspect of disclosure of financial information. And finally, we will be talking about the boundaries of disclosure: In a free market economy, where economic information flows freely, what are the boundaries of that disclosure, and how can companies protect themselves in this competitive environment and maintain their ability to do business? So, let us begin.

ADDRESS

Omkar Goswami

I want to discuss the way and the what of corporate governance and its role in the dissemination of information. What is corporate governance? Simply, it is a manner in which a company is organized, run, and supervised. It is basically a structure of relationship between the company on the one hand, a legal entity in itself, and its stakeholders, workers, creditors, employees, society, and shareholders, on the other hand; as well as the legal and institutional framework, the structure of law, and the structure of institutions within which the company operates; and the relationship of the management with the board of directors, stakeholders.

Why corporate governance? Let me start with a very simple example. Suppose any one of us had a propriety company and it was a company where you managed everything from your own point, just one proprietor and you had workers producing things, no banks, no financial institutions, no shareholding, except this one owner. Would a company such as that need corporate governance in the way we understand it? The answer is probably not, because the interest of the proprietor is completely aligned with the interest of the company. When the company becomes larger, when there are many shareholders, when you have to take public funds, from shareholders or from creditors or banks or financial institutions, it is different.

Let me start from the historical perspective. This term "corporate governance" is originally alluded to by Adam Smith in 1776, in Wealth of Nations. But the way we understand it is quite new. In the United States, it only came in the 1970s and 1980s, with the major drop in corporate values, mismanagement, and takeover battles. In the UK in the early 1990s, massive financial market scandals brought this into focus, and in Southeast and especially East Asia, after 1997-98, in response to the financial crises. India is a bit of an outlier, because it was driven from 1996, oddly enough, by industry rather than any other organization, and it happened to be CII.

The theoretical perspective is something called "agency cost," which means, basically, who are the principals of the company? They are the owners, the shareholders, and in a wider context, the stakeholders, creditors, society, workers, employees. They are the company's managers, and there is absolutely no reason for us to a priori believe that the interest of the principals and the interests of the agents are exactly in line. In fact, more often than not, the two interests differ substantially. The role of corporate governance is basically trying to align the interests. That is, you, the management, will run this company according to the interests of the principals, minimize your agency costs (you can never eliminate them). There is a disjoint that is taking place between the ownership. The shareholders, in some sense, fundamentally own the company, but the company is controlled by the management, and basically, how do you align them? That is why we talk about financial and non-financial disclosure, laws to protect shareholder interests.

There are two types of agents costs, and one of them is far more prevalent in Asia than in the United States. One type you are looking as a whole lot of dispersed shareholders. No one shareholder accounts for any sizeable percentage of ownership. Management here has a great advantage of having this dispersal, because no one shareholder can counter-vote. What happened a lot in Britain in the 1980s and in America in the 1970s and 1980s, the management decided to align itself separately from shareholders, make their own empires, and systematically reduced corporate value. This, in the literature, is the efficiency aspect of agency cost. That is, agency costs work in a manner that makes a company inefficient, reduces corporate value, and opens it up to takeover battles. And it does not give the value it could give, if it was more efficient. In East Asia and Southeast Asia, there are a large number of companies where the controlling management has shares well above 50 percent, and then you have minority shareholders. Now what the management then does is, by virtue of owning a sizeable stake, it is not inefficient, because it knows very well that if it is inefficient, it is going to be inefficient to itself. But it expropriates denying minority shareholders their rights. A second agency cost, and as I was saying, the efficiency agency costs was very much a U.S. and a British phenomenon, while the expropriation of minority shareholders was very much a South Asia and East Asian phenomenon. India, as you know, we take the best of both worlds.

Now, how does one minimize it? The areas that I will discuss are through independent boards of directors; through the quality and periodicity of financial and non-financial disclosures to the board and to the shareholders; through strengthening shareholders and stakeholders' rights; and, externally, through efficient bankruptcy laws and procedures, creating a transparent market for corporate takeover, and for efficient corporate and contract enforcing laws.

I will start with the internal: what is the board of directors? Many of us here are on the boards of companies, and we have completely forgotten what our role is. We have forgotten the meaning of the word fiduciary. Just to give a simple example, things would not have happened in India in the UTI had the board of trustees done what they had to do: exercise their fiduciary responsibilities. They used to meet every two months. What questions did they ask? When a chairperson of a company in an annual meeting keeps on saying "your company," what does he mean? It means something very, very significant. It means that you, the shareholders, are the "owners" of the company. It means that we, the directors, are your trustees, and our job is to maximize your long-term value, simultaneously, and maintain good will with all the others. We do this by overseeing management on your behalf. A board of directors is very responsible, first and foremost, to the shareholders. We have forgotten that. Most boards have forgotten it, most boards are full of people waiting to have their lunch and a club class ticket and one night in a hotel room. We are your fiduciaries and we have forgotten the meaning. It means someone given a job to hold in trust. The board is selected by shareholders, nominated by other board members, but eventually, you are elected by shareholders and you are responsible for seeing that the management is aligned to the long term interests of the shareholders. Why do we need independent boards? Because if you have a board which is eventually packed with managers of the company, why should these managers necessarily look after the interests of the shareholders, instead of their own interests? And that is exactly the reason there has been a move to have independent directors.

The job of an independent director is not in conflict with other directors. Like any other director, an independent director's job is to oversee the growth in the corporate value, and therefore the value of the company in which I am a director. It also does not mean that it is not collegial, but being independent, we should be able to say "no" when the occasion demands. If there is a resolution coming up, which does not make sense, we should be able to argue that in a collegial way. And if we cannot do it, then we should have the courage of conviction to say that this board is not meant for me. In listed companies in India, today it is mandated that one-third of the board has to be independent if the chairman is a non-executive director, and half has to be independent if the chairman is also an executive.

Now the Securities and Exchange Board of India (SEBI) has mandated questions thanks to initially the kind of protest and work done that was done by the CII: What is the composition of the board? How many are executives? How many are non-executives? Within the non-executives, how many are independent? I agree that you could go overboard with legal definitions, but the thing that one has to remember is that you must be able to exercise independence, and exercising independence means being able to say things, in a collegial manner, without fear and favor. And when it is not listened to, in a systematic way, to be able to say, "Sorry, wrong number. I am not the right guy for your board."

Do we disclose the business interests of the non-executive director? It is very, very critical. Do I have interests that relate to the company? Of course, it should be disclosed. Why should the world not know, down to the last rupee, what the company is remunerating the director? After all, the directors are functionaries of shareholders, and shareholders ought to know what they are being paid. What are the relationships of directors with each other? Do they have any other relationships? Because that can affect judgment. What is the attendance record? One of the best things that we have now done is make this public. It is public now. A lot of people, particularly directors of financial institutions, have red faces, because out of six board meetings, their attendance was two, and not only is it public, many of us are asking shareholders in shareholder meetings, why the hell are we re-electing this guy if he attends two board meetings out of six, and for the other four, what inputs did he give by teleconferencing, etc.? Tell us what he has done for the company, otherwise, why should we elect the guy? Now, these are all mandated in India. Very important to know how many outsider directorships you hold-again mandated in India.

Today, the job of directors has become so complex, as has the amount of strategic inputs you have to give and the time you have to give to a company. On an average, if you look at the Fortune 500 companies, or the SNP companies in the United States, a non-executive director does not hold more than 4.3 board seats. Each requires about 20 working days' time of a non-executive director. If you have 20 directorships, either you are a superman, or you are doing no work in any of them. The necessity of a well-functioning audit committee has been mandated in India, but I can tell you that there are not more than 30 companies in India, with audit committees. I have to say this with great pride-I am on the board of two companies, which have probably the best audit committees, Infosys and Dr. Reddy's Laboratory. The audit committee is important because it sees whether internal audit functions have been carried out properly and reports this to shareholders and discusses it with the board. It is also a committee that talks to external auditors and questions them about any difficulty that they have faced. In other words, it protects the financial downside of a company, and it is very important.

There is also a need for a transparent remuneration committee. After all, people are going to be paid on the board level. The manner in which and why and how they are going to be paid, what they are going to be paid-just as we have tried to do things transparently for executives below the board level, we should have a remuneration committee that does it for the board level.

The kind of information that is offered by the management to non-executive directors has to be evaluated, otherwise you cannot be a proper non-executive director. Are they active participants? Is the board a rubber stamp? How much are they paid for their time? So, if a company asks you to be a director, and it is a profit-making company, and it says "I can't pay you," what the company's management is trying to tell you is that "I really do not value your time, and I don't expect you to do anything." So, why should one join that board? Just to be a "bauble on a Christmas tree"?

The kind of information that I expect a company to share with its shareholders is annual operating plans, budget, updated long-term plans, quarterly results including divisions and segments, tax audits and internal audit reports, all materially important legal notices, environmental problems, labor problems and their solutions, disposal of public funds, investments, sale of assets, particularly brands is a very good way of short changing shareholders, For exchange exposure approaching standards, the question is very simple and an international investor understands the accounts of the company and get a true and fair picture? What kind of accounting standards do you follow and is that accounting standard in line with USGAP or with IAAS? Is there consolidation of accounts? I will tell you why consolidation of accounts is important, with associate companies, in terms of the amount of equity owned and related party transaction being totally disclosed. In India, from the 1st of April, they have to disclose this, and segment reporting is mandatory horizontally across segments and vertically down to what is the bottom line.

Now, what is the treatment of defer tax liability? It is a technical point, but very important. Remember in all countries in the world, the depreciation that is charged or shown in the annual accounts of a company is usually less than the depreciation allowable by the income tax authorities As a result, all other things being equal, the profits that you are showing to the shareholder is very different from the profits that you are showing to the tax authorities. As a result of anomalies between the two depreciation rates, you always have a defer tax credit or a defer tax debit. Is this being shown so that you can align the two accounts and the shareholder can know what the two accounts mean? This has again become mandatory. The detail of the debt that companies take on-we are very bad at this. Dual companies in India give detailed information on risk management. But what are they doing about this management, especially foreign exchange risk, use of public funds, especially if you have been deviated from your prospectus? We are very bad at this-details of contingent liabilities. Any point of time, there are contingent liabilities on a company, in India, there are two classes of statutory public audits, class I, tough on contingent liabilities, and Class II, easy on contingent liabilities. There is a thriving market for auditors, who are easy on contingent liabilities, and will turn a Nelson's eye to it. Do you propose to keep it under a pillow? Do you propose to invest it? Do you propose to give it at a higher dividend? After all, at the end of the day, it is my money, as a shareholder. Do you, the external auditors, fudge their qualifications and notes on accounts? or do they give a really true and fair review? These are questions that we keep needing to ask. Do they disclose the company's performance in detail, including the downside, the Economic Value Added (EVA) over the years and business cycle? What is the share performance vs. the market index. This is of course (now mandated in India)? What is the share ownership and distribution (also mandated)?

How are minority share holders treated in corporate law and in practice? You may treat it well in law, but have no concern for it in actual practice. Do they have the right to raise issues against policies and changes that unfairly affect their status? Is there cumulative voting? What is the conduct of the annual extraordinary shareholder meetings? Very important. How quickly does the chairman slur over minority shareholdings, etc? Can minority shareholders raise objections to mergers or unfair share swap ratios and if so, what happens?

Now, I will come to the legal framework. I think it is important for all of us to remember that it is impossible to have desirable corporate governance in a country which is weak in bankruptcy laws and has barriers to takeovers. A company can do badly for many reasons, but if it systematically does badly and under-performs, two things will happen. It will renege on creditors, keep on as a matter of course, not being able to repay creditors, as a "willful defaulter." Now, unless I, as a secure creditor, threaten credibly and take you to bankruptcy, you, as a company, have absolutely no fear of me. And that completely debases the disciplining role of the debt. If debt has no threat and equity has no threat, then how can you have corporate governance? Basic laws govern bankruptcy-we have Sick Industrial Company Act (SICA) and an agency called BIFA looks after it. It has many serious problems-late detection, it is very cumbersome, time-consuming process, and requires a total overhaul. Bankruptcy liquidation, basically winding up, is even more inefficient. It take years to liquidate a company, usually never less than 10. Market for equity is much better. You have to disclose your holding, greater than 5 percent (the trigger for takeovers is 15 percent). Minimum offer price has to be last six months' stock price, and you are allowed an acquisition management of less than or equal to 5 percent.

Finally, who are going to be the guardians of corporate governance? First and foremost, a free press. We are lucky in India about this and have, by and large, a press with sufficient financial acumen. On a scale of 1 to 10, we are 6.5 or 7 on that score. We need to have more people with financial acumen. A well functioning stock market, which, in a very transparent way, rewards the good and punishes the poor. Our stock market needs more width and depth, before that happens. Financial analysts thought their role is not as lily-white as you think of them to be. Efficient bankruptcy procedures and mutual funds also need addressing-I can tell you this-nine out of ten mutual funds do not give a diddle about corporate governance. They are only interested in churning stocks-as do activists' long term pension funds. We also need a board that understands its fiduciary duties.

Shek Voon Jen

I would very much like to take one element that is essential to all communication, which is relevant to business and economic information-that is the process of change. Change is endemic and very necessary for all of us, to see how we ourselves, have to move with the cheese. There are a lot of important issues that are driving this paradigm shift. First is the process of globalization, of supranational business and corporation, and it is very important to see that happening in a global world, without, necessarily, the globalization of labor itself. The second aspect is the reformation of the World Trade Organization. China, the largest nation in humankind, will be joining it and I think even the Chinese themselves, (through a recent Tinghua Agency release) has indicated too many challenges to the county itself.

State-owned enterprises would have to deal with market access. The traditional financial accounting reporting system is actually being stretched. What we are actually now seeing is that it is being moved towards a system of measurement of economic value, in terms of creation of value. This is very fundamental to the international accounting standards that we are looking at. To use a very simple analogy, you could be traveling in India, on a highway in a Marutican, and you may not have a GPS, you may be using local accounting standards to navigate. But, With a Global Positioning System the analogy is with international accounting standards, which would then be the comparable software, to enable you to read the signal. There is this major issue between international standards and the dominant capital markets, what is important is the injection of capital and where this capital is coming from. This world is very different from the one stewardship financial reporting catered to. It is a world principally of privately held equity, under Anglo-Saxon principal of company law, where you have boards that are nominated by board members at the AGM. Presumably, the majority shareholders, and there are also minority shareholders, which, in this context, may be family members or supporters of the family group.

But when you look into the efficient market hypothesis, you are dealing with tested vehicles and institutional investors, or smaller retail investors, depending upon your investor base. Very often too, there are other stakeholders, the government, union members and all of these are claimants on the traditional reporting system, which is, in this present point of time, under challenge. Now, what you, in the media have to be acutely aware of, it is how the traditional financial reporting system, in accordance with local, generally accepted, accounting principals, as modified by international accounting standards is steering this vehicle for the constituent, in which you are representing your stakeholder interests. A major, major, development is that the traditional stewardship reporting function is under stress and under change. This is also being done very significantly, through the process of redistribution of manufacturer and service industry, looking at the interest propriety right. In India, you already see that happening in terms of establishment of international call centers, where operators are actually being guided and trained in the way of American consumer habits. You also have software programmers, who are building up software that is necessary to give the additional buffer to the people who sell hardware itself. This is actually a complementary but fast expanding factor, in this paradigm shift.

Also another element that organizations as we know them may not be relevant and what may replace them is a network or coalition of interests of people able to manage, create, and deliver knowledge, to ensure the continual survival of the coalition of interests. What is actually happening, is that as these factors make their way into local economy, through the process of globalization, via market access, market reforms, deregulations, these supernationals will have to make a decision, as to how best to refinance their operations in the local economy. So, there is, a debate going on between the major regulators, the U.S. Security Exchange Commission, and the supernationals who wish to determine how to get access to capital flows, either in terms of additional acquisition or in terms of expansions in the local market itself. The SEC is becoming much more proactive in engaging the services of international organization for security commission-ISCO. The SEC has recognized that people list or do not list on the U.S. market, for a whole variety of reasons. Some of these reasons are exposure to U.S. litigation, for a whole variety of reasons, where domestic pressures may retain their need to be listed on the whole market, or that they have no compunctions in following U.S. generally-accepted accounting principals-a standard for which you may have no input in formulating, and where disclosure may be more onerous for registering. Nevertheless, the SEC is aware that there is still an enormous market for the 2000 major corporations overseas, not listed on the U.S. market. So, somewhere in the not too distant future, we hope that there is going to be a convergence by the major regulators in this world, which will be consistent, flexible, and will apply to majority of reporting situations. But as we all know, having a converging international accounts standard is insufficient to enable a framework, which is needed to measure the impact of this paradigm shift on global corporations, local economy and interested shareholders. So, there is a need to have a global accounting framework, which will take into account, harmonize and converge international accounting standards together and these standards are actually being discussed actively for the past three years. There has also been a proposal from meeting Asian Executives in Bangkok to have corporate governance incorporated into the ISO standard. Also, we need to ensure that we have account standard setters, in this framework, and their compliance. Also, that reporting is being done by reputable firms, with world-wide quality assurance settings and the people who ensure compliance, have open and transparent disclosure standards on which monitoring activities are carried out. it is that framework in itself, which is of utmost importance.

The SEC has also taken on board some of the IA standards on cash flow data, hyper inflation, and on business combination, and they are also working with the IAS Committee. But the bottom line is, there is much more that needs to be done, in order to ensure true convergence. In my paper, I just mention a recent standard that was adopted and published by the IAS, number 41, on agriculture. Even then, after all these years, it is fairly difficult, I think, to say what the exact impact has been on standard in the India agricultural sector. In other words, accountants are not likely to be dull and boring creatures, but at some future point of time, they are going to be wholly subjective, opinionated and perhaps be known as valuers of integrity.

Now, I think the question of corporate governance depends on good independent directors. This raises the question, not only of quantum of fees, but also the professionalism of these directors, and their capacity in working effectively as a watchdog. The third issue is that an independent director in order to exercise his or her professional judgment, for the benefit of these minority shareholders, stakeholders, needs professional indemnity insurance, because without this, he cannot do it. The fourth issue is really important. If the independent director is to take on, at times, an adversarial role, in which conflict of interests are being drawn up, then what support would such an independent director need? In Singapore, behind the scene, we have these debates, between some of the independent directors and the regulatory agencies. In this brave, new, world in the 21st century, the people who will be involved, in the dissemination of relevant corporate and business information, would need to be extremely elastic, professionals of multilateral dexterity, working with a network of interested rapporteurs and on which the value and the measurement of corporations and the results are properly measured. There is one final matter which should be referred to. In the reporting and economic information, it has always been compressed into one dimension and that is to report in financial terms In my paper, I have also referred to the need for non-financial measurement of effectiveness and this has been promulgated by the American Accounting Association in the early 1980s, has been widely researched in the literature.

Rahul Roy

Are our accounts meaningful to international investors, and are these accounts meaningful for comparison purposes even to the Indian stakeholders? This could be comparing accounts of one entity to another similar entity, or perhaps comparing accounts of the same entity for present period and for past periods. The evolution of accounting, the journey from counting to measuring, accounting to disclosure, evolved as a process of "keeping a count of"-counting parallely. Even auditing evolved not from what we see as auditing today, but from the Latin word "audia," which means to hear, and the auditor of old used to stand beside the Russian granaries, when somebody would fill the grain stacks, and they would hear the numbers being called out, see the grain stocks being filled, compare both and lend a degree of assurance. So, from its humbler beginning of counting and for this beginning, it goes back to the Sumerians. It gradually progressed to matching what is counted, not absolute counting, along with what are the expenses incurred for this. So, that gave rise to the matching concept, and measurement. Now, the major development in the field of accounting came in 1494, when Luca Pacioli formulated the double-entry system and certain basic axioms and concepts evolved. We talk about a growing concern, accrual and consistency as the three basic principles. We see that accounting, initially, was an offshoot of arithmetic, simple, but gradually evolved the underlying complexities of the business world, different types of financial instruments, different foreign exchange regimes in different countries, trading across borders, different rides and returns, different transactions. Today organizations follow different types of growth strategies. They used to form an organization and grow gradually, now, they quantum leap the growth process, by going in for mergers, acquisitions, realizing that certain parts have to be de-merged. Who will account for these transactions? How to measure their value? How to account for it? These were all complexities and since these were questions being raised in various parts of the world, answers had to be found. And in the process standardization came about. An accountant had shifted from counting to disclosures to shareholders, to the public right of information that is accurate, comparable, which will facilitate benchmarking, across the enterprise and across the country, for different time periods. Around about 1970s, most of the major standard-setters around the world were formulated. We have the FASB (Financial Accounting Standard Board) set up in 1973 in the U.S., that is the progenitor of USGAP. Then we had the International Accounting Standards Committee set up in 1975, recently rechristened the International Accounting Standard Board, and in India we had the Accounting Standard Board of the Institute of Chartered Accountants set up in 1977. When you fast forward to 2001, you see that all three have gone in different directions: some have moved, some have not moved.

What are the main points that determine the effectiveness of standards and the effectiveness of standard setters? First and foremost, legislative support came after two and a half decades in India. Now there is a rule which says that all CPS practicing must certify statements as FASB pronouncements, which are collectively known as the USGAP, legislatively enshrined. Many different authorities began setting their own standards. So, the greater legislative support, the more effective, the lesser the multiplicity, the more effective. Evolution of standard setting architecture required a standard Interpretive Committee to interpret standards and those interpretations would be added onto the standards. An Emerging Issues Task Forces would be required to identify emerging issues and to try push them up to the standard level before practice becomes divergent. You would also have accounting research organizations, which would do pure research and issue research bulletins for tomorrow's standards.

Fourth point, due diligence is needed in the process of standard setting. The standard setting must be participatory. You just cannot have accountants sitting in their ivory towers. It must have the users, academicians, industrialists, all the interest groups, organized trade unions, and financiers. How participative and transparent is the standard setting mechanism? Recently the IASB has opened up its standard setting meetings to public viewing. The dates of the board meetings are notified in advance, and the public can apply for the viewer passes.

Last comes the question of harmonization to some stated international standard, even for the most developed standard setters. For example, in the 1980s, a famous German automotive manufacturer, on the German Gap, showed a $380-odd million profit, translates its accounts into USGAP, with a $3 billion loss. So it is not technology that is not up to the mark, but the move towards certain basic accounting concepts towards one world standard, among developed nations, with investors from one country, reporting in another country. India has consciously aligned itself with international accounting standards (IASB). From January this year, the IASB constitution has be revised giving the standard setters across the world, especially in the U.S., greater say in the advisory councils and trustee board, and, second, the International Organization of Security Organizations, (IOSO) the umbrella organization where all security exchange commissions are affiliated to, has commissioned the IACS to develop a core set of standards which will be mandated and promulgated through their affiliates in all global markets. The two moves are important for pushing for harmonization though total convergence is a distant dream.

Unfortunately in India, although the Accounting Standards Board was formed in 1977 it was only in October 1998, that the government amended corporate law, making it mandatory to adhere to accounting standards promulgated by the ASB. We lost a lot of critical time. Secondly, one basic difference, between Indian and international standards is that international standards have moved towards fair value concepts. Basically, that is a transaction not recorded and carried forward in perpetuity, on the basis of the historical cost, at the time of the transaction. This could allow asset shipping of old organizations where depreciated assets were valued at nearly nil today. A Fair Value concept assumes existence, knowledge, transparency and depth of the market. In India we have a tendency for the commas, the full stops, the semi colons, the legal interpretations and the way to struggle out of standards and laws which provides a hidden peril. We also have to develop industry specific standards, for example, for the insurance and agriculture industry, which are being made for the extractive industry, but still needed particularly in oil and natural gas industries, and banks. In the first 22 years of the IASB's existence, we issued 15 standards. After government recognition in 1998, this year we have issued seven standards, and in the next six months, eight more standards are on the anvil, explosion of the standard setting pace. But are we educating the users, the leaders, enough to implement this? The big question mark, though, you have the Institute of Chartered Accountants, through its ASB, the Corporate Act, and the Constitution, virtually a replica, as far as posts and people go, of the ASBs.

We have got the income tax authorities, who, through Section 145 in the Indian Income Tax Laws, do legislate separate accounting standards on some areas; we have got the Insurance Regulatory Authority to regulate the insurance business; the Foreign Exchange Dealers' Association of India (FADAI) which issues standards for authorized dealers, including banks which the banks have waged this long, long war of attrition on. AS 11 of the Foreign Exchange Dealers' Disclosures and ultimately, the institution was forced to go back and say, FADAI standards will apply there: There is SEBI, which is coming for\ward with its monographs, of special accounting of standards for dot-com companies; and the RBI Indian Bankers' Association issuing pronouncements which verge on standard setting.

So with this multiplicity, there is bound to be a certain degree of confusion, overlap, lack of clarity and often divergence in approach. Mandatory versus non-mandatory standards, is I would say, the next challenge for Indian standard setters. We have non- mandatory standards here. We would be able to take a public position by saying that we have got all the standards, which the IASC has set, but, it would not be mandatory. A critical example is the Consolidated Financial Statement standard, set up recently, saying this standard will apply to those entities who want to consolidate their accounts. SEBI is insisting listed entities consolidate their accounts. The standard-setting architecture, in India involves a research committee, a Principals' Board equivalent, but not an emerging issues task force. But a 14-step due diligent procedure, from the end of the public users though responses are extremely paltry, making the standard setting not as participatory as intended. We have to educate the people more.

Another area, where Indian standards are different from certain international standards, is that we prescribe the methodology to be followed, unlike the international standards which give best benchmarking treatment they call it, and alternative treatment. Now, we come to the role of disclosure standards. Certain standards can be differentiated into measurement, how to value an inventory stocks, and disclosure. (Key disclosures, relevant for the right to public information for stakeholders, for example, segment reporting, explaining the risks and rewards of each part of the business and any transaction or links with related parties, and key management personnel, plus of course, the consolidated financial statement, introduced from this year).

Essentially, the accounts are the responsibility of the management. Again, with effect from the new amendment of the Company's Act, the Director's Responsibility Statement has been statutorily mandated. He will take responsibility for overseeing, systems of internal control are in place, assets are safeguarded, appropriate accounting standards have been adopted. You used to have the well-informed citizen, who is well governed and the board of directors through the Audit Committee would rely on comfort letters that standards had been adhered to. Now that is not going to hold water. With the Director's Responsibility Statement there is much greater awareness to directors of the importance of accounting standards and disclosure requirements. The Audit Committee, with the filing given by the Corporate Governance and the listing requirements by the CII is, or ought to be playing a stellar role in a large number of corporates. Directors are asking how to make sure that their responsibility is safeguarded. Questions are being asked. And I do see some level of Non-Executive director-level activism beyond the legislation. I would like to classify companies under three groups-the most common corporate citizen are those who are purely legislation driven. "I disclose this, because the legislation requires me to do this, if there is a comma or a full stop in the legislation, which permits me to escape disclosing this, please help me to find it out, because then I would not like to disclose this." The second category is image driven-I have seen others develop a brilliant, well-governed corporate image because of the large number of disclosures that they have in their balance sheets. Also peer pressure driven. My shareholders will walk up to the dais at the AGM and say, "why don't you show this sir? Your competitor has shown this." The third are the concept driven. I have seen a number of these corporate citizens, who do not fall under the listing requirements, but still want to know what would be the best for our company. Do a board effectiveness study, evaluate our CEO performance, because we feel the concept of corporate governance is something which we believe in. The bottom line is that, corporate governance, at the end of the day, will be market driven and it is at informed gatherings like this, people like you will go out and disseminate the need for corporate governance, educate people about their rights to information and become more vocal, more demanding, more critical, more analytical. Ultimately the more the market is educated about its right to demand information the more corporate governance and disclosure practices would move into the domain of actual "internalization," beyond legislation.

Greg Gehlmann

Regulatory disclosure of public corporations is vital. If you want to test on any exchange, Indian, Hong Kong, New York, the exchanger will try and enforce some sort of disclosure mechanism on those companies. Also, there is a general requirement that corporations need to disclose prior to trading and security. In other words, if you are an "insider" and if you have information that other people do not have, you should be prohibited from trading on that information without disclosing. Finally, corporations in the mandatory setting, have a duty to correct, in the event that they have some really inaccurate information, as soon as possible.

The movement in corporates is not only to mandatory disclosure, but voluntary disclosure. Often, in a disclosure framework, the voluntary disclosure is, much more important to investors that what is on the line item. This information is usually forward-looking, called "soft information" where the corporate is disclosing what it thinks it will be doing in the future. Corporations are wary to disclose this kind of information without adequate protection, a type of safe harbor for voluntary disclosure. The U.S. has recently enacted a "safe harbor" forward looking statement provided that corporations state that they are forward-looking statements. For example, if I am in India I say expect the yield to be 60 percent, they would say that there can be no assurance that we could reach that figure and it is subject to various items such as drought, monsoon or whatever. Also there is the issue of disclosure to intermediaries, stock analysts, government entities, principal shareholders. Any framework for corporate disclosure needs to level the playing field and make sure that these individual are not getting access to information that may or may not be given to the general public. However, the regulatory framework should be flexible enough to encourage to disclosure, in a regulatory sense, to their various agencies that may oversee them. However, if they are candid, and disclose to the government, these should be maintained secret or private, unless government or law requires that in the betterment of the public good, these need to be disclosed.

Corporate disclosures in the information age has really changed. We have instant information. Every corporation, on the New York Stock Exchange / NASDAG, has what is called the "chat room." You can go there and find out what investors are saying about the stocks, at all times. The need for real-time information is very much in demand at this point, and the corporate disclosure frameworks have not addressed that. However, transparency does have its limits. First of all, in a general sense, corporations should arguably only have to regularly disclose what is material. However, it is very unlikely that you are going to get a corporation to make those disclosures, so there are mandatory structures. What is material? Basically, any information that an investor would consider important before buying and selling stock. Corporations have so sought to have more limitations on intellectual property, patent and trademarks, copyrights, trade secrets. Intellectual property shares the exclusionary aspect of general property. However, it is intrinsically intangible. Now, for a company to move across borders in manufacturing it will seek its lowest cost denominator. Developing countries have sought very hard to limit the crossing the boundaries of intellectual property law, with various treaties and agreements on patents, trade marks and loyalties. Trade secrets are very nebulous. A good example in India back in the 1970s, was when Coca Cola, according to Indian laws at that time, had to have a majority corporation in India, and that would have meant their disclosing of the Coke formula to Indian companies. The fact was that they had to pull out of the Indian market, rather than disclose its trade secret. The arguments under trade secret laws are that since corporations spend a great deal of money developing a corporate niche, they should be compensated for that work and not have their hard work exploited at their expense by others without some form of compensation. In any type of disclosure and protection format, there must be sub-standards and recourse from infringements, criminal sanctions.

Another area is environmental disclosure. Corporations have to evaluate what they spend on complying with environmental laws, liabilities, legal proceedings and any type of corporate action. This has to be weighed against the stakeholders who seek much more disclosure in environment, on anything from global-warming, contaminated land, toxic waste to resource yield. A framework has to be set up to set out environmental liabilities and what disclosures need to be done and create a safe harbor for corporations that act outside of the box, so to speak and work to resolve environmental issues, prior to their becoming prohibitive.

In the mergers and acquisition area, corporations should be able to discuss the context in private. Anytime that information is leaked the corporate stock is going to be affected, and people are going to get their value of the deal. So, disclosure should be as confidential as possible. Equally, corporations should refrain from trading on their own security. Thus a corporation should, at that time, disclose that they are trading or that they are negotiating a merger, and prior incorrect statements must be corrected.

In the area of plant closures in the U.S., there has been a big movement by local municipalities and governments to seek disclosure of plant closures, or more than 100 lay offs, requiring 60 days prior notice. The two interests, the company and the community, need to be balanced here and agencies also need to be careful here. Social and ethical issues have become more and more of concern to corporations where once they used to be just the concern of the state. Disclosures on matters to do with human rights, labor, fraud and corruption are for the most part, voluntary, unless they are "material."

Basically, any type of corporate framework or type of disclosure has to weigh up the costs and benefits. Benefits of corporate disclosure are obviously numerous: they reduce information cost; they decrease the potential for shareholder losses; they improve management credibility; they increase investor confidence; they increase analysis following; they reduce the estimation risk; they stabilize the share price; they lower the cost of capital; and they reduce, substantially, government regulations. Some of the costs of disclosure: they discourage corporate cooperation; corporations tend to try to keep their secrets to themselves; they increase direct preparation monitoring and ordering (there was about $81.7 billion raised in the U.S. in 1995, 2percent was figured for complying with corporate disclosure, a total of $1.6 billion). Potential loss of proprietary information, via the World Wide Web; increase of legal tasks and in dealing with disclosure.

Two items that help disclosure-first important to level the playing field, and here insider trading laws are very helpful. If you have information as an insider that is material to the corporation, you should either not trade in that security, or cause the corporation to disclose it. Second, to express and apply rights of action. Thus a good framework in the legal sense allows corporations to be sued for inaccurate information by shareholders-backed by a government, which enforces corporate security laws.

In closing, I note that globalization and innovation have been rapidly changing the market, the organizations and the institutions. It is difficult to determine the specific form of corporate disclosure for any type of specific jurisdiction. However, one thing is certain: reliable, accurate, and timely, information is a market fundamental. Globalization is forcing the convergence of standards: technology operates in the market-place transcending legal and geographic boundaries, forcing regulatory convergence. Technology is threatening traditional franchises and structures. Rapidly changing complexities require action, and the power to weigh the cost and benefit of the various stakeholders. In order for a corporate disclosure to work, governments should try balancing the interests of all stakeholders, including the need of corporations to limit disclosure in order to compete. They should strengthen corporate governance mechanisms to encourage corporate disclosure, ensuring that the mechanisms are not so burdensome as to be inefficient. They should promote comparability and reliability. They should enforce standards and guidelines for the corporations and also provide investors with the vehicles to seek redress. They should seek to protect proprietary interests in the areas of intellectual property, and invest time and resources to educate the investors, consumers and the public.

In an information society, disclosure is necessary. However, governments must continue to examine the various stakeholder interests and balancing the interests of the stakeholders and the corporations, to have an efficient and open economy.

KEY DISCUSSION POINTS

Disclosure norms within the public sector, for banks and financial institutions are defined quite differently from disclosure norms for instance of a manufacturing company, even within the public sector. The disclosure norms will vary as to whether it is regarded as a company under the Companies' Act, whether it is listed or unlisted and whether it is a separate corporation under the Parliament and so on.
On the effectiveness of the mandatory disclosures system, questions were asked on a possible early warning system and a system of flow of information, and whether the framework of corporate governance addresses the problems raised by press relations, publicity relations, and how the deal with information disclosure through the press. In many countries, including the Philippines, PR budgets are a source of corruption of the media and disinformation propaganda. The role of PR and PR firms involved in this disclosure communication, must be to balance the category of corporate disclosure between the commerce and the image and conceptual one, to ensure that the disclosure that is being made meaningful to interested parties, are also available to people who are shareholders or who may want to become shareholders and equally to stakeholders.
The media can often twist "disclosure" for professional or other reasons . For example, in the U.S., last week, shareholders were awarded compensation for a TV commentator giving a wrong advise about a company's health.
There is a need to focus more on international regimes, decided as political deliberations between global players. For example, note the debate between the EU and the U.S. on accounting standards, leading to the creation of a harmonized system of accounting? Standards depend on interests, different countries and trading players have different costs and benefits, such as internet trade where tremendous fights are taking place, on privacy, content, and taxation. The U.S. feels that the moratorium on taxation, agreed in Geneva, should continue, on content, there are opposing views, and on privacy, the U.S. wants a far more business-driven regime that secures the privacy of consumers in Internet trade, whereas, the EU wants a far more regulatory, government driven regime on privacy.
Disclosure rules have often been very, very different, if not de jure, then certainly de facto. The bulk of government servants, all government servants and many public sector employees, have money. There were warnings about in the public provident funds, as pensions (GPF or Contributory Provident Fund, CPF) which have not promised complete disclosure of the investment of those provident funds and the quality of the state government paper. Thus, today, the state of Maharashtra has a 36 percent revenue deficit, and it has already reneged on one state government paper. Have we, as contributories to the provident fund, done the corporate governance to see the quality of those papers? Class action suits may provide the wake-up call. One answer suggested was a dividend policy, which ensures that any original investment will come to maturity in a 10-year or 15-year period, and the funds should be liquidated and the pecuniary interests of the trustees should be specifically monitored on a fund concept. There should be an all-party monitoring unit, of the highest integrity, as a sub-division of Public Accounting Committee to specifically report on these issues. Whatever disclosure you make to them, fair disclosure should be made to all parties.

Jagdish Shettigar

I do agree that information, especially economic information, is crucial for governance. While I do concede that information is crucial for good governance, though I really do not know what is the type of information is not available, or what is the exact nature of the "information gap" that is coming in the way of good governance? Or to put it in a simple language, what is needed to the translate the policy measures with the cooperation with the different partners of development, including industry. But, definitely, there is a scope for improvement in supplying the information, and the availability of information is not only in the interest of the economy, but also of the policy-makers, to allow transparency in implementation of policy measures. Without proper feedback from the society, policy-makers may not be able to evolve a particular policy, in a fool-proof manner, allowing for different sections of the society. Keeping that in mind, policy-makers may be able to evolve measures in such a way that there will not be any adverse impact, and strike a healthy balance between the different interest groups, when a particular policy is initiated. Often, the interest of different sections, or the interests of different segments within industry, may clash with each other. Now in the absence of proper information, it may be quite possible that a particular segment of the industry or the section of the society, may succeed in influencing the policy decision. Since the other segment is not aware, of the information or what is being cooked at the level of the policy-makers, they may not be able to provide their point of view to the government. But, if during the process stage itself, the information is provided to society, naturally the different segments will express their views. Specially during the last couple of years, I have become familiar with different view points of different segments of the industry. I am also familiar with how certain decisions were taken, keeping the interest or view point of a particular segment of society. Often, the government has to rectify policy decisions taken, even the budgetary proposals given have to be rectified after introduction to the Parliament because at the time of the formulation of the budget, interest groups try to influence policy measures. Because, by and large, the policy-makers do not like to initiate a policy which would be harmful to the economy or to the society. Similarly, the availability of information at the appropriate time is also important. If there is a complete transparency at different levels, it will help. For instance in China, it is a time-bound clearance. The process has been divided into four stages, and at each stage, the entrepreneur is told the fate of his project. Only when he gets the green signal, will he move onto the second or the third stage. Here, it is only at the end, one is told whether it is a green or a red signal, with time and resources wasted.

I would also like to point out that there is certain sensitive information that cannot be shared. This cannot be left totally to the policy-makers or the bureaucracy to identify because they will classify each and everything as secret. Sometimes, I get a letter as a member of the National Security Advisory Board, marked "strictly confidential." When I open the envelope, there is another envelope marked "strictly confidential," when I open that envelope, I will find some article related to Pakistan or China and I do not know what the secret in that is. This is in the nature of the bureaucracy. Through open, public debate like this, one can arrive at a consensus about the areas or types or nature of information that can be classified as sensitive, which need not be shared with the public. In these modern days, there is no point in maintaining too much secrecy, because those who can manage, are able to get the information they want, whatever type of information it may be. It should be available as a matter of right, so that there is level playing-ground, and equality among all the players. Let me also say that flow of information should not be one-way traffic. It is not only that the government should share the information. In good governance, it is equally important for the government to get information from society. Often, even in the areas where the government has all the right to get the required information, there is distortion, resulting in a gap in the information. So, sometimes even the government does not get the correct picture about the production on exports or imports and the so called official statistics on the imports and exports, are not actuals as export is over invoiced, or import under-invoiced or sometimes the other way round. The result is the capital flight from the country. According to an estimation made by a research group, every year there is a capital flight of $4-5 billion. I am convinced that these things do take place. Being a straightforward economist I was not being able to understand. Now with this, I have been convinced there is a lot of revenue loss, resulting in adverse impact on the developmental process. So, even the availability of information to the government is crucial to good governance. Because if the government can get proper resources through proper information, with regard to maybe production, export, import, then I am sure that we will be able to meet some of our demands, maybe in the form of infrastructural development or social capital development, ultimately leading to good governance.

Let me conclude by saying that filling in the resource gap is crucial for good governance and every segment should have the freedom to get the required information in the sensitive area and information flow should not be one way.

KEY DISCUSSION POINTS

Questions were raised as to why the Government of India did not provide information on the sale of companies (for example, Modern Foods), for the sake of the workers who were involved, or indeed about corporates, who are under-performing. However, not everything can be disclosed. It was noted that during a process there are certain norms that one has to maintain regarding bids from different parties, when you can not share the information. These are sensitive issues.
It was noted that the Indian government is already committed to introducing a time-bound policy clearance system for foreign investment along the lines followed in China. The proposal is also to extend it to domestic projects.
Non-Performing Assets (NPAs), (when the borrower fails to service the loan within a specified period) have their own disclosure rules, and their names can not be disclosed, according to current Indian Banking Law. Also, it was noted that the present Industrial Dispute Act bars any unviable commercial unit from closing down without clearance from state government, if the labor force is more than 100 (proposed to rise to 1000) and needs to be amended, as units have been running over the past 15-20 years, technically, when there is no production or no manufacturing taking place, and, naturally, borrow.
Corruption, including evasion of tax, black money, poor judiciary, is really a major factor affecting good governance, it was agreed. This cannot easily be contained or controlled through policy approaches. Certain measures have been taken In India-on discretionary powers with the Finance Minister, collection of data, even disclosing the Permanent Account no. on large transactions-to minimize the scope of black money. There is a need to decrease the stamp duty in property deals. But if you want to follow the short cut, naturally you have to bribe with black money.
Electoral reforms have also to be implemented. There have been two commissions in India-the Verghese Committee, on the freedom of press, and the Vohra Commission on the criminalization of politics, yet government after government did not implement any of these recommendations. Recommendations of these two commissions would go a long way in winning freedom of information. Everybody knows that the ceiling on expenditure is unrealistic. Yet public funding of political parties is unrealistic as business people would not like to get identified, unlike the system in the U.S., and they would like to pay through the black money. Again only an alert electorate can prevent the criminalization of society. Criminals continue to be elected, not by using "muscle power," but by influencing the voters, giving gifts, depending upon the status of the individual, some money and people in the middle or allied class were given gold bangles. People themselves are complicit.
It was suggested the media could play the role of giving information on behalf of society. However, it was also noted that the media does not play an impartial role.